Investing great John Bogle: “Here’s how to use ETFs!”

Note: This 2013 interview between Ron DeLegge at ETFguide and John Bogle from the Vanguard Group is from ETFguide’s archives of investing greats. Bogle passed away on January 16, 2019.

Hi everybody. I’m Ron DeLegge with and we’re pleased to have with us John Bogle, founder of the Vanguard Group, author of many books, his latest, Clash of the Cultures. Pick up a copy on Amazon. It’s a great book. John Bogle, always great to catch up with you.

Ron, good to see you. Thanks for all the nice things you’ve written.

DeLegge: Well, I appreciate that. And let’s begin with something that you said years ago about ETFs, that ETFs are like giving an arsonist matches. Do you still feel that way today?

Bogle: Yes. It’s even worse today, actually.

DeLegge: And explain for us the reasons why you feel that way.

Bogle: Well, using the proper ETFs in the proper way is a perfectly intelligent strategy. Just so long as you don’t fall for their basic selling proposition, which is get out of the market in the middle of the day, anytime you want to get out real time, sell them in real time. This is terrible investment strategy. You don’t need to do that. The temptation is there, but ETFs, like the original traditional index funds, do offer total stock market, S&P 500, international market, total bond market, maybe even emerging market. And they’re perfectly intelligent ways to own them, just so long as you don’t trade them.

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But ETFs make it possible to trade them momentarily, so they’re no better than anything else and they have the temptation to be worse. And then actually in Vanguard’s case, the ETF, our S&P 500 ETF owns the same portfolio, identical portfolio as the traditional index fund. So just don’t trade them. The rest of the business when you get… I’m going to guess, Ron, that out of 1,400, 1,500, I guess, ETFs, there may be 40 broad market ETFs and they’re larger… SPDR is the biggest of all… but that leaves you 1,460 that are in many respects kind of fruit and nut cakes.

DeLegge: So that’s a good place for people to begin, is with the broadly diversified investment or ETFs that follow broad-based indexes?

Provided they don’t trade them.

Right. Now, talking about trading volume, let me ask you, you’ve mentioned it many, many times about the massive trading volume of these ETFs. For the buy and hold ETF investor, how does that hurt them?

Well, it’s hard to say. It hurts them a lot, but when you think about it, and people talk about the growth of this great marketing idea, and it is a great marketing idea. I doubt it’s a great investment idea, because the way they’re used and the kind of funds that are created, but the Standard & Poor’s index fund run by State Street, called the SPDR, turns over 7,500% a year. And that’s a lot of turnover.
I think 10% is too high, Ron. You can imagine what I think about 75. There’s a marginal hurt in a fund with that kind of-

But for the buy and hold investor that owns that same ETF, they’re not being hurt by that.

Well, the record would show that you’re pretty much right. I think the investor is doing a little bit worse than they would owning the regular S&P 500, but probably not material.

If investors are going to use ETFs, what is the right way to do that?

By the broad market indexes and not these crazy things like triple inverse leverage like commodities, even like gold, and very narrow, the Korean market or the single country or a tiny industry segment. The more specialized it is, the less I like it. So the choice of ETFs is the large broad market ones. And the way to use them for the individual investor in all cases is not to trade them. So buy and hold, buy and hold, buy and hold.

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